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David Peterson loses big bucks in drug price war

The value of former premier David Peterson’s holdings in Shoppers Drug Mart has tumbled almost half a million dollars in the drug price war between pharmacists and his sister-in-law, Health Minister Deb Matthews.

By Rob FergusonQueen’s Park Bureau

Sat., May 8, 2010

The value of former premier David Peterson’s holdings in Shoppers Drug Mart has tumbled almost half a million dollars in the drug price war between pharmacists and his sister-in-law, Health Minister Deb Matthews.

With Matthews shepherding the prescription reforms that Bay St. analysts blame for causing a drop of 19.6 per cent since Dec. 31 in shares of Shoppers, Peterson is caught on the other side of the fence as a member of the board of directors at the giant drug chain.

The year “is clearly proving an annuls horribilis for the company and the Canadian pharmacy industry,” Scotia Capital analyst Patricia Baker wrote in an advisory to investors on the drug price changes, expected to be implemented later this month.

The reforms will force a 50 per cent cut in the price of generic drugs and ban $750 million a year in “professional allowance” payouts from generic drug companies to drug stores, which pharmacists say will be a major blow to their revenues.

Shares in Shoppers are down $8.90 this year, closing at $36.51 Friday, near a low of $34.93 reached earlier this week. While the drug reforms weren’t announced until April 7, industry watchers knew negotiations with the health ministry began last July and have been concerned ever since.

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“It has been a drag on the shares for quite some time,” said an analyst from a major brokerage house, who spoke on condition of anonymity. The shares peaked at $50 last July.

Here’s how Peterson’s holdings have fallen this year alone, calculated from figures in the company’s latest management proxy circular dated March 23:

• His 2,000 shares are down $17,800 since Shoppers shares closed at $45.41 last Dec. 31.

• His 8,333 deferred share units – essentially delayed payment in shares that have not been granted yet, said David Goldreich, an associate professor of finance at the University of Toronto’s Rotman school of management – are down $74,163.70.

• At the closing price of $36.51 Friday, Peterson’s option to buy 60,000 Shoppers shares if they reach a price of $44.02 by 2016 per cent is now $7.51 per share or a total of $450,600 out of the money.

“They’re well under water,” added Goldreich, who teaches MBA students and holds a PhD in financial economics from Carnegie Mellon University in Pittsburgh.

That is a significant gap to make up, but it is not the best measure of how much less the options are worth, the professor explained.

That is calculated through a complicated valuation formula for options known as the Black-Scholes model, which takes into account factors including estimated annual interest rates, time to option expiry and stock price volatility. It was developed in 1973.

Given the likelihood that the Shoppers share price will be above $44.02 by the time the options expire in six years, Goldreich said the formula shows those options worth $738,882 at the late December price of around $45, falling to $382,492 with the shares around $36.

That is a drop of $356,390. Combined with the decline in value of Peterson’s shares at $17,800 and deferred shares at $74,163.70, the tally of his loss – on paper at least – comes to $448,353.70.

Peterson did not return phone calls and emails seeking comment over the last week but Matthews said she and her brother-in-law, premier from 1985 to 1990, have not spoken a word about the reforms.

“We haven’t even talked about talking about it,” said Matthews, whose sister, Shelley, is married to Peterson. “I know the job he’s got and he knows the job I’ve got.”

Matthews said the issue and the fallout hasn’t gotten between them when they get together about twice a month.

“We’re very, very close friends as well as relatives.”

Matthews was a key political player for Peterson in the 1980s, playing important roles in the 1985 and 1987 campaign. The Petersons attended Matthews’ swearing in as a cabinet minister in 2007 – the former premier beaming with pride.

Peterson has sat on the board of directors at Shoppers Drug Mart since 2006.

But Peterson, a lawyer since 1969, is by no means pinched by his paper losses on Shoppers stock. He is chairman and senior partner of the law firm Cassels Brock & Blackwell, and sits on several corporate boards, in addition to charity and community work.

Shoppers pays its directors $60,000 annually. Peterson earned $118,480 as a director of cable and cell phone giant Rogers Communications last year, where he holds 49,000 class B shares and 52,453 deferred share units with a value of $3.47 million as of March 10, the company’s latest information circular shows.

Peterson is also on the board of Franco-Nevada Corporation, which pays directors an annual retainer of $30,000. A recent circular from the mining, oil and gas company says Peterson’s 75,000 shares and 2,379 deferred shares were worth $2.1 million on March 31.

There is a good chance Peterson’s stake in Shoppers Drug Mart will climb out of the red once the controversy over the drug price reforms settles down and the company adjusts to the reduced revenue by boosting sales of other products and cutting costs.

Scotia Capital has set a one-year price target of $48 – down from a previous forecast of $54, which is now a two-year target set by the brokerage house.

“We hold to a view that in the long run Shoppers will emerge from these changes with an operating model that permits them to gain share and build on the leading position in the market,” Scotia Capital analyst Baker wrote in her research note.

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